Page | 1 SunMarg Education

(i) any compensation or other payment for, any person, by whatever name
called, at or in connection with the
termination or the modification of the
terms and conditions, of any contract
relating to his business.

ii) the value of any benefit or perquisite, whether

convertible into money or not, arising from
business or the exercise of a profession.

iii) any interest, salary, bonus, commission, or

remuneration, by whatever name called, due to,
or received by, a partner of a firm from such
firm:

Provided that where any interest, salary, bonus, commission, or

remuneration, by whatever name called, or any part thereof has not been

allowed to be deducted under clause (b) of section 40, the income under this

clause shall be adjusted to the extent of the amount not so allowed to be

deducted.

iv) any sum, whether received or receivable, in

cash or kind, under an agreement for—

a. not carrying out any activity in relation

to any business or profession; or

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b. not sharing any know-how, patent, copyright, trademark, license,

franchise or any other business or commercial right of similar nature or
information or technique likely to assist in the manufacture or processing
of goods or provision for services:

v) any sum, whether received or receivable, in cash or kind, on account of

transfer of the right to manufacture, produce or process any article or thing
or right to carry on any business or profession, which is chargeable under
the head "Capital gains”.

vi) any sum received under a Keyman insurance

policy including the sum allocated by way of
bonus on such policy.

vii) the fair market value of inventory as on the

date on which it is converted into, or treated
as, a capital asset determined in the
prescribed manner shall be treated as
business income.

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1. Amount paid on account of rent, rates, taxes,

repairs (not including expenditure in the nature
of capital expenditure) and

2. insurance for buildings used for the purpose of

business or profession.

In case the premises are occupied by the assessee as a tenant, the amount of

repairs would be allowed as deduction only if he has undertaken to bear the

cost of repairs to the premises.

Section 31.

Amount paid on account for current repairs and

insurance of machinery, plant and furniture used for
the purpose of business or profession.

 Depreciation is mandatorily allowable as deduction.

Conditions for claiming depreciation.

 Asset must be used for the purpose of business or profession at any time
during the previous year.

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If the asset is acquired during the previous year and is put to use for less
than 180 days during that previous year then, only 50% of the
depreciation calculated at the rates prescribed will be allowed.

 The asset should be owned (wholly or partly) by the assessee.

 The depreciation shall be allowed on the written down value of block of

assets at the prescribed rates (except in the case of assets of power
generating units, in respect of which depreciation has to be calculated as a
percentage of actual cost).

 Additional depreciation at the rate of 20%

of actual cost of plant or machinery
acquired and installed after 31.03.2005
by an assessee engaged in the business of
manufacture or production of any article
or thing or in the business of generation,
transmission, or distribution of power,
shall be allowed.

 If plant and machinery is acquired and put to use for the purpose of business
or profession for less than 180 days during the previous year in which it is
acquired, additional depreciation will get restricted to 10% of actual cost
(i.e., 50% of 20%). The balance additional depreciation@10% of actual cost
will be allowed in the immediately succeeding previous year.

However, additional depreciation will not be allowed on the following plant

or machinery:

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• Ships, aircraft, road transport vehicles, office appliances.

• Machinery previously used by any other person.

• Machinery installed in any office premises, residential

accommodation, or guest house.

Machinery in respect of which, the whole of the actual cost is fully allowed as
deduction (whether by way of depreciation or otherwise) of any one previous
year.

Note:

Eligibility for grant of additional depreciation under section 32(1)(iia) in the case of an assessee
engaged in printing or printing and publishing

An assessee, engaged in the business of manufacture or production of an article or thing, is eligible to claim
additional depreciation under section 32(1)(iia) in addition to the normal depreciation under section 32(1).

The CBDT has, vide this Circular, clarified that the business of printing or printing and publishing amounts to
manufacture or production of an article or thing and is, therefore, eligible for additional depreciation under
section 32(1)(iia).

I Buildings
Block 1. Buildings which are used mainly for residential purposes except hotels and boarding houses 5%
Block 2. Buildings which are not used mainly for residential purposes and not covered by Block (1) 10%
above and (3) below
Block 3. Buildings acquired on or after 1st September, 2002 for installing machinery and plant 40%
forming part of water supply project or water treatment system and which is put to use for
the purpose of business of providing infrastructure facilities
Block 4. Purely temporary erections such as wooden structures 40%

II Furniture and Fittings

Block 1. Furniture and fittings including electrical fittings [“Electrical fittings” include electrical wiring, 10%
switches, sockets, other fittings and fans, etc.]
III Plant & Machinery
Block 1. (i) Motor cars other than those used in a business of running them on hire, acquired during 30%
the period from 23.8.2019 to 31.03.2020 and put to use on or before 31.03.2020
(ii) Motor cars other than those used in a business of running them on hire, acquired or put 15%
to use on or after 1-4-1990 [Other than motor cars mentioned in (i) above]
Block 2. (i) Motors buses, motor lorries, motor taxis used in a business of running them on hire, 45%
acquired during the period from 23.8.2019 to 31.03.2020 and put to use on or before
31.03.2020

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(ii) Motors buses, motor lorries, motor taxis used in the business of running them on hire 30%
[Other than mentioned in (i) above]
Block 3. Moulds used in rubber and plastic goods factories 30%
Block 4. Aeroplanes, Aeroengines 40%
Block 5. Specified air pollution control equipment’s, water pollution control equipment’s, solid waste 40%
control equipment and solid waste recycling and resource recovery systems
Block 6. Plant & Machinery used in semi-conductor industry covering all Integrated Circuits (Ics) 30%
Block 7. Life saving medical equipment 40%
Block 8. st 40%
Machinery and plant, acquired and installed on or after the 1 day of September, 2002 in a
water supply project or a water treatment system and which is put to use for the purpose of
business of providing infrastructure facility
Block 9. Oil wells 15%
Block 10. Renewable Energy Saving Devices (as specified) 40%
(i) Windmills and any specially designed devices which run on windmills installed on or after 40%
1.4.2014
(ii) Any special devices including electric generators and pumps running on wind energy 40%
installed on or after 1.4.2014 would be eligible for depreciation
(iii) Windmills and any specially designed devices running on windmills installed on or before 15%
31.3.2014 and any special devices including electric generators and pumps running on wind
energy installed on or before 31.3.2014
Block 11. Computers including computer software 40%
Block 12. Books (annual publications or other than annual publications) owned by assessees carrying 40%
on a profession
Block 13. Books owned by assessees carrying on business in running lending libraries 40%
Block 14. Plant & machinery (General rate) 15%
IV Ships
Block 1. Ocean-going ships 20%
Block 2. Vessels ordinarily operating on inland waters not covered by Block (3) below 20%
Speed boats operating on inland water 20%
PART B INTANGIBLE ASSETS
Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of 25%
similar nature, not being goodwill of a business or profession

Contributions to Outsiders
Contributions made by any assessee to certain specified/ approved institutions

shall be entitled to deduction of 100% of contribution made to:

Expenditure incurred by assessee.

 Any revenue and capital expenditure (other than cost of acquisition of

land) on scientific research for in-house research related to its business is
allowable as deduction.

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 Deduction is also allowed in respect of payment of salary or purchase of

material inputs for such scientific research during 3 years immediately
preceding the year of commencement of business. Such expenditure is
deemed to have been incurred in the year of commencement of business
and is, hence, allowed as deduction in that year.

 Capital expenditure incurred during 3 years immediately preceding the

year of commencement of the business is also deemed to have been
incurred in the year in which the business commences, and is hence,
allowed as deduction in that year

In case of companies engaged in the business of bio-technology or manufacture

or production of article or thing, other than the article or thing listed in the
Eleventh Schedule (alcohol spirits, tobacco and tobacco products, cosmetics and
toilet preparations, confectionary and chocolates, tooth paste, dental cream,
tooth powder and soap), deduction of 100% of expenditure incurred on
scientific research on in-house research and development facility is allowed
(other than expenditure on cost of land or building)
Section Association/University/Company/College/IIT
35(1)(ii) Notified approved research association/university/ college/ other institution for
scientific research
35(1)(iia) Approved notified Company for scientific research
35(1)(iii) Notified approved research association/university/ college/ other institution for
research in social science or statistical research
35(2AA) Approved National Laboratory/ University/ IIT/ specified person to be used for
scientific research undertaken under an approved programme

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This section provides for investment-linked tax deduction in respect of the

following specified businesses commencing operations on or after the dates
specified thereto -

 setting-up and operating ‘cold chain’ facilities for

specified products (commencing operations on or after
1.4.2009).

 setting-up and operating warehousing facilities for

storing agricultural produce (commencing operations
on or after 1.4.2009).

 laying and operating a cross-country natural

gas or crude or petroleum oil pipeline network
for distribution, including storage facilities
being an integral part of such network
(commencing operations on or after 1.4.2007).

 building and operating a hotel of two-star or

above category, anywhere in India
(commencing operations on or after 1.4.2010).

 building and operating a hospital, anywhere in

India, with at least 100 beds for patients
(commencing operations on or after 1.4.2010).

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 developing and building a

housing project under a
notified scheme for slum
redevelopment or
rehabilitation framed by
the Central Government
or a State Government (commencing operations on or after 1.4.2010).

 developing and building a housing project

under a notified scheme for affordable
housing framed by the Central
Government or State Government
(commencing operations on or after
1.4.2011).

 production of fertilizer in India (commencing

operations on or after 1.4.s2011).

 setting up and operating an inland

container depot or a container
freight station notified or
approved under the Customs Act,
1962 (commencing operations on
or after 1.4.2012).

 bee-keeping and production of honey and beeswax

(commencing operations on or after 1.4.2012);

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 setting up and operating a warehousing

facility for storage of sugar (commencing
operations on or after 1.4.2012).

 laying and operating a slurry pipeline for

transportation of iron-ore (commencing
operations on or after 1.4.2014).

 setting up and operating a semiconductor

wafer fabrication manufacturing unit if such
unit is notified by the Board in accordance
with the prescribed guidelines (commencing
operations on or after 1.4.2014).

 developing or maintaining and

operating or developing, maintaining,
and operating a new infrastructure
facility (commencing operations on or
after 1.4.2017)

Quantum of deduction –

100% of the capital expenditure (other than expenditure on acquisition of any

land, goodwill, or financial instrument) incurred during the previous year,
wholly and exclusively for the above specified businesses would be allowed as
deduction from the business income of an assessee if he has opted for the
provisions of section 35AD.

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Further, the expenditure incurred, wholly and exclusively, for the purpose of

specified business prior to commencement of operation would be allowed as

deduction during the previous year in which the assessee commences operation

of his specified business, provided the amount incurred prior to commencement

has been capitalized in the books of account of the assessee on the date of

commencement of its operations.

Payment exceeding ₹ 10,000 to be made through prescribed electronic modes

to qualify for deduction u/s 35AD –

Any expenditure in respect of which payment or aggregate of payment made

to a person of an amount exceeding ₹ 10,000 in a day otherwise than by
account payee cheque drawn on a bank or an account payee bank draft or use
of electronic clearing system through a bank account or through such other
prescribed electronic modes would not be eligible for deduction.

Non-eligibility for deduction u/s 10AA or Chapter VI-A –

An assessee availing investment-linked tax deduction u/s 35AD in respect of
any specified business in any assessment year, is not eligible for claiming profit-
linked deduction under Chapter VI-A or section 10AA for the same or any
other A.Y. in respect of such specified business if the assessee has claimed or
opted for section 35AD and deduction thereunder has been allowed to him.

Asset to be used only for specified business for 8 years –

Any asset in respect of which a deduction is claimed and allowed under section

35AD shall be used only for the specified business, for a period of 8 years

beginning with the previous year in which such asset is acquired or constructed.

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If such asset is used for any purpose other than the specified business, the total

amount of deduction so claimed and allowed u/s 35AD in any previous year in

respect of such asset, as reduced by the depreciation allowable under section 32

as if no deduction had been allowed under section 35AD, shall be deemed to be

the business income of the assessee of the previous year in which the asset is so

used.

 shall be allowed as deduction over a period of 5 years beginning with the

previous year in which business commences or in which extension of the
undertaking is completed or the new unit commences operation or
productions.

Examples of Preliminary expenses.

 expenses on preparation of project report, feasibility report, market survey,

engineering services, legal charges for drafting agreement

 In case of a Company, preliminary expenses would include, in addition to the

above, legal charges for drafting MOA, AOA, printing of MOA and AOA, fee
for registration of Co., expenditure in connection with issue of shares or
debentures of Co. (i.e., underwriting commission, brokerage and charges for
drafting, typing, printing and advertisement of the prospectus)

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Qualifying amount
 Maximum aggregate amount of the qualifying expenses that can be
amortized is 5% of the cost of project (i.e., actual cost of fixed assets in the
books of account on the last day of the P.Y.).

 In case of an Indian company, 5% of the cost of project or at its option, 5%

of the capital employed by the company (aggregate of issued share capital,

debentures, long-term borrowings as on the last day of the P.Y.), whichever
is higher.

 In any previous year in the form of payment to any employee in connection

with his voluntary retirement in accordance with a scheme of voluntary
retirement, shall be allowed as deduction in that previous year and

 the balance in four equal instalments in the immediately four succeeding

previous years.

However, any interest paid for acquisition of an asset (whether capitalized in

the books of account or not) for any period beginning from the date on which

the capital was borrowed for acquisition of the asset till the date on which such

asset was first put to use, shall not be allowed as deduction.

36(1)(iv) Any sum paid by the assessee as an employer by way of contribution

towards a recognized provident fund or approved superannuation fund.

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 Any sum paid by the assessee as an employer by way of contribution towards

a pension scheme referred to in section 80CCD, to the extent of 10% of
salary of any employee.

 Salary includes dearness allowance if the terms of employment so provided.

 Correspondingly, section 40A(9) disallows the sum paid in excess of 10% of

the salary of any employee

Any bad debts written off as irrecoverable in the accounts of the assessee for
the previous year, provided the debt has been taken into account in computing
the income of the previous year or any earlier previous year.

 Any bona fide expenditure incurred by a company for the purpose of

promoting family planning amongst its employees.

 In case the expenditure or part thereof is of capital nature, one-fifth of such

expenditure shall be deducted for the previous year in which it was incurred;
and the balance in four equal instalments in four succeeding previous years.

 Family planning expenses, whether revenue or capital, is not allowable as

deduction for non-corporate assesses, like individuals, HUFs, firms, LLPs.

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 An amount equal to the securities transaction tax (STT) paid by the assessee
in respect of taxable securities transactions entered into in the course of his
business during the previous year, if the income arising from such taxable
securities transactions is

 included in the income computed under the head “Profits and gains of
business or profession.

An amount equal to commodities transaction tax (CTT) paid in respect of

taxable commodities transactions entered into the course of business during the
previous year, if the income arising from such taxable commodities transactions
is included in the income computed under the head “Profits and gains of
business or profession”.

An expenditure shall be allowed under section 37, provided:

 it is not in the nature of expenditure described under sections 30 to 36.

 it is not in the nature of capital expenditure.

 it is not a personal expenditure of the assessee.

 it is laid out and expended wholly and exclusively for the purpose of
business/profession.

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 it is not incurred for any purpose which is an offence, or which is

prohibited by law; and

 it is not an expenditure incurred by the assessee on CSR activities referred

to in section 135 of the Companies Act, 2013.

37(2B) Any expenditure incurred for advertisement in any souvenir, brochure,

tract, pamphlet etc. published by a political party is not allowable as deduction.

 Any interest, royalty, fees for technical services or other sum chargeable
under the Act, which is payable outside India or in India to a non-corporate
non-resident or to a foreign company, on which tax deductible at source has
not been deducted or after deduction has not been paid on or before the due
date specified under section 139(1).

 However, if such tax has been deducted in any subsequent year or has been
deducted in the previous year but paid in the subsequent year after the due
date specified under section 139(1), such sum shall be allowed as deduction
in computing the income of the previous year in which such tax is paid.

 30% of any sum payable to a resident on which tax is deductible at source

under Chapter XVII-B and such tax has not been deducted or, after
deduction has not been paid on or before the due date for filing of return of
income under section 139(1).

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 However, if such tax has been deducted in any subsequent year or has been
deducted in the previous year but paid in the subsequent year after the due
date specified under section 139(1), 30% of such sum shall be allowed as
deduction in computing the income of the previous year in which such tax is
paid.

Any sum paid on account of income-tax

Any payment chargeable under the head “Salaries”, if it is payable outside

India or to a non-resident, if tax has not been paid thereon nor deducted
therefrom.

Tax paid by the employer on non-monetary perquisites provided to its

employees, which is exempt under section 10(10CC) in the hands of the
employee.

(i) Salary, bonus, commission, or remuneration, by whatever name called, paid to any partner
who is not a working partner;
(ii) Payment of remuneration to a working partner or interest to any partner, which is not –
• authorized by the partnership deed; or
• in accordance with the terms of the partnership deed.

(iii) Payment of remuneration to a working partner or interest to any partner authorized by

and in accordance with the terms of the partnership deed but relates to a period falling
prior to the date of such partnership and is not authorized by the earlier partnership deed.

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(iv) Payment of interest to any partner authorised by and in accordance with the terms of the
partnership deed and falling after the date of the partnership deed to the extent of the
excess of the amount calculated at 12% simple interest per annum.
(v) Payment of remuneration to a working partner which is authorized by and in accordance
with the partnership deed to the extent the aggregate of such payment to working partners
exceed the following limits

(b) On the balance of book-profit 60%

(a) On the first ₹ 3,00,000 of the book-profit ₹ 1,50,000 or 90% of the book-
or in case of a loss profit, whichever is more.

 Book profit means the net profit as shown in the P & L A/c for the
relevant previous year computed in accordance with the provisions for
computing income from profits and gains.

 The above amount should be increased by the remuneration paid or

payable to all partners of the firm if the same has been deducted while

computing net profit.

Expenses or payments not deductible in certain circumstances

40A (2)
Any expenditure incurred in respect of which a payment is made to a related
person or entity, to the extent it is considered excessive or unreasonable by the
Assessing Officer.

Firm Any partner of the firm or relative of such partner

HUF or AOP Any member of the AOP or HUF or any relative of such member
Company Director of the company or any relative of the director
Any assessee Any individual who has a substantial interest (20% or more voting power or
beneficial entitlement to 20% of profits) in the business or profession of the
assessee; or A relative of such individual.

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 Any expenditure, in respect of which a payment or aggregate of payments

made to a person in a single day otherwise than by account payee cheque or
account payee bank draft or ECS through bank account or through such
other prescribed electronic modes exceeds ₹ 10,000.

 In case of payments made to transport operator for plying, hiring or leasing

goods carriages, an enhanced limit of ₹ 35,000 shall apply.

 If the payment/payments exceed this limit, the entire expenditure would be

disallowed.

 However, disallowance would not be attracted if the cases and circumstances

in which payment is made otherwise than by way of an account payee
cheque or bank draft are covered in Rule 6DD.

Few Examples of exceptions covered in Rule 6DD:

 Payment to RBI, SBI, Co-operative banks
 Payment made to Government, which according to its Rules, has to be made
in legal tender.
 Payment for purchase of agricultural produce, forest produce, fish and fish

products, productions of horticulture or apiculture to the cultivator, grower

or producer of such produce or products.

Where an expenditure has been allowed as deduction on accrual basis in any

previous year, and payment is made in a subsequent previous year otherwise
than by account payee cheque or account payee bank draft or ECS through
bank account or through such other prescribed electronic modes and such

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payment (or aggregate of payments made to a person in a day is made in a

subsequent previous year) is in excess of the limits of ₹ 10,000/ ₹ 35,000
specified above, the payment/aggregate of payments so made shall be deemed
as profits and gains of the business or profession and charged to tax as income
of the subsequent previous year.

However, the deeming provision will not apply in the cases and circumstances
covered in Rule 6DD.

However, disallowance would not be attracted if provision is made for

contribution to approved gratuity fund or for payment of gratuity that has
become payable during the year.

1. Where deduction was allowed in respect of loss, expenditure, or trading

liability for any year and subsequently, during any previous year, the assessee
or successor of the business has obtained any amount in respect of such loss
or expenditure or some benefit in respect of such trading liability by way of
remission or cessation thereof, the amount obtained, or the value of benefit
accrued shall be deemed to be income of the P.Y. in which such benefit was
obtained.

3. Amount realized on transfer of an asset used for scientific research without

being used for other purposes is taxable as business income in the year of sale
to the extent of lower of –

a. deduction allowed under section 35(1)(iv); and

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b. excess of sale proceeds and deduction allowed u/s 35(1)(iv) over the
capital expenditure incurred.

4. Any amount recovered by the assessee against bad debt earlier allowed as
deduction shall be taxed as income in the year in which it is received.

In respect of the following sums payable by an assessee during the P.Y.,

deduction is allowable only if the sum is actually paid on or before the due date
of filing of return under section 139(1) for the said P.Y. Otherwise, the same
would be allowed only in the year in which the sum is actually paid.

(i) Tax, duty, cess or fee, under any law for the time being in force; or
(ii) Contribution to any provident fund or superannuation fund or gratuity fund or any other
fund for the welfare of employees; or
(iii) Bonus or commission for services rendered by employees, where such sum would not have
been payable to him as profits or dividend if it had not been paid as bonus or commission; or
(iv) Interest on any loan or borrowing from any public financial institution or a State Financial
Corporation or a State Industrial Investment Corporation, in accordance with the terms and
conditions of the agreement governing such loan or borrowing; or
(v) Interest on any loan or borrowing from a deposit taking NBFC or systemically important
non-deposit taking NBFC (i.e., whose total assets as per the last audited Balance Sheet is ₹
500 crore or more), in accordance with the terms and conditions of the agreement
governing such loan or borrowing
(vi) Interest on any loan or advance from a scheduled bank or co-operative bank other than a
primary agricultural credit society or a primary co-operative agricultural and rural
development bank in accordance with the terms and conditions of the agreement governing
such loan or advances; or
(vii) Payment in lieu of any leave at the credit of his employee.
(viii) Any sum payable to the Indian Railways for use of Railway assets.

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Where the consideration for the transfer of an asset (other than capital asset),
being land or building or both, is less than the stamp duty value, the value so
adopted or assessed or assessable (i.e., the stamp duty value) shall be deemed to
be the full value of the consideration for the purposes of computing income
under the head “Profits and gains of business or profession”.

However, if the stamp duty value does not exceed 110% of the actual
consideration received or accruing then, such consideration shall be deemed to
be the full value of consideration for the purpose of computing profits and gains
from transfer of such asset.

Further, where the date of an agreement fixing the value of consideration for
the transfer of the asset and the date of registration of the transfer of the asset
are not same, the stamp duty value may be taken as on the date of the
agreement for transfer instead of on the date of registration for such transfer,
provided at least a part of the consideration has been received by way of an
account payee cheque/ account payee bank draft or use of ECS through a bank
account or through such other prescribed electronic modes on or before the
date of the agreement.

Particulars
Net profit as per statement of profit and loss
Add: Expenses debited to statement of profit and loss but not allowable
• Depreciation as per books of accounts
• Income-tax [disallowed u/s 40(a)(ii)]
• 30% of sum payable to residents on which tax is not deducted at source or has not been remitted on or before the due date
u/s 139(1), after deduction, disallowed under section 40(a)(ia)

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Any expenditure incurred, in respect of which payment is made for goods, services or facilities to a related person, to the
extent the same is excessive or unreasonable, in the opinion of the A.O, having regard to its FMV [disallowed u/s 40A(2)
Any expenditure incurred in respect of which payment or aggregate of payments to a person exceeding ₹ 10,000 in a single
day is made otherwise than by way of A/c payee cheque/bank draft/ use of ECS through bank A/c or through such other
prescribed electronic mode (debit card, credit card, Net banking, RTGS, NEFT, IMPS, BHIM Aadhar Pay) [disallowed u/s
40A(3)]

Certain sums payable by the assessee which have not been paid during the relevant P.Y. in which the liability was incurred on
or before the due date for filing return u/s 139(1) in respect of that P.Y. [disallowed u/s 43B]
Personal expenses [not allowable as per section 37]
Capital expenditure [not allowable as per section 37]
Repairs of capital nature [not allowable as per Sections 30 & 31]
Amortization of preliminary expenditure u/s 35D/ expenditure incurred under voluntary retirement scheme u/s 35DDA
[4/5th of such expenditure to be added back]
Fine or penalty paid for infringement or breach of law [However, penalty in the nature of damages for delay in completion of
a contract, being compensatory in nature, is allowable]
All expenses related to income which is not taxable under this head e.g. municipal taxes in respect of residential house property

Any sum paid by the assessee as an employer by way of contribution to pension scheme u/s 80CCD exceeding 10% of the
salary of the employee
(A + B)
Less:
Depreciation computed as per Rule 5 of Income-tax Rules, 1962
Additional depreciation@20% of actual cost of new P & M acquired by an assessee engaged in the business of manufacture or
production of any article or thing or generation, transmission, or distribution of power (10% of actual cost, if put to use for
less than 180 days in the year of acquisition) [Balance additional depreciation can be claimed in the next year i.e., P.Y.2021-
22]

• Balance additional depreciation @10% of actual cost of P & M acquired and installed during the P.Y. 2019-20 and put to
use for less than 180 days in that year

Balance additional depreciation @17.5% of actual cost of P & M acquired and installed during the P.Y. 2019-20 and put to
use for less than 180 days in that year, if the manufacturing undertaking is set up in a notified backward area in the State of
A.P./Bihar/Telangana/West Bengal on or after 1.4.2015
(C - D)
Less:

Income credited in statement of profit and loss but not taxable/taxable under any other head.
Dividend income
Agricultural income exempts under section 10(1)
Interest on securities/savings bank account/FD taxable under the head “Income from other sources
Capital gain.
IHP
Winnings from lotteries, horse races, games etc. taxable under the head “Income from other sources
Gifts
exempt or taxable under the head “Income from other sources”
Income tax refund not taxable
Interest on income-tax refund taxable under the head
“Income from other sources
Add – Deemed income
Salary, remuneration, interest received by a partner from the firm to the extent the same is deductible in

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the hands of the firm as per section 40(b)Bad debt allowed as deduction u/s 36(1)(vii) in an earlier PY, now recovered
[deemed as income u/s 41(4)]
Remission or cessation of a trading liability [deemed as income u/s 41(1)]

Questions

ILLUSTRATION 1
Mr. X, a proprietor engaged in manufacturing business, furnishes the following

particulars:

(1) Opening WDV of plant and machinery as on 1.4.2020 30,00,000

(2) New plant and machinery purchased and put to use on 08.06.2020 20,00,000
(3) New plant and machinery acquired and put to use on 15.12.2020 8,00,000
(4) Computer acquired and installed in the office premises on 2.1.2021 3,00,000
Compute the amount of depreciation and additional depreciation as per the Income-tax Act, 1961 for the A.Y. 2021-22.
Assume that all the assets were purchased by way of account payee cheque.

Sol:

Particulars Plant & Computer

Machinery (40%)
(15%)
Normal depreciation 7,50,000 -
@15% on ` 50,00,000 [See Working Notes 1 & 2]

60,000 -
@7.5% (50% of 15%, since put to use for less than 180 days) on ` 8,00,000
@20% (50% of 40%, since put to use for less than 180 days) on ` 3,00,000 - 60,000

Additional Depreciation 4,00,000 --

80,000

@20% on ` 20,00,000 (new plant and machinery put to use for more than 180 days)

@10% (50% of 20%, since put to use for less than 180 days) on ` 8,00,000
Total depreciation 12,90,000 60,000

ILLUSTRATION 2
A car purchased by Dr. Soman on 10.08.2017 for ₹ 5,25,000 for personal use is brought into professional use on 1.07.2020 by
him, when its market value was ₹ 2,50,000. Compute the actual cost of the car and the amount of depreciation for the
assessment year 2021-22 assuming the rate of depreciation to be 15%.

Sol:

As per section 43(1), the expression “actual cost” would mean the actual cost of asset to the assessee. The purchase price of ` 5,25,000 is, therefore, the actual cost of the car 5.25L. Explanation 5 to
section 43(1) providing for reduction of notional depreciation from the date of acquisition of asset for personal use to determine actual cost of the asset is applicable only in case of building which is initially
acquired for personal use and later brought into professional use. It is not applicable in respect of other assets.

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ILLUSTRATION 4
Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for motor vehicles on
1.1.2020. The manufacturing unit was set up on 1.5.2020. He commenced his manufacturing
operations on 1.6.2020.

The total cost of the plant and machinery installed in the unit is ₹ 120 crore. The said plant and
machinery included secondhand plant and machinery bought for ₹ 20 crore and new plant and
machinery for scientific research relating to the business of the assessee acquired at a cost of ₹ 15 crore.

Compute the amount of depreciation allowable under section 32 of the Income-tax Act, 1961 in

respect of the assessment year 2021-22. Assume that all the assets were purchased by way of account

payee cheque and Mr. Gamma has not opted for the provisions of section 115BAC.

Sol:

Computation of depreciation allowable for the A.Y. 2022-23 in the hands of Mr. Gamma

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ILLUSTRATION 5
Mr. A, furnishes the following particulars for the P.Y.2020-21. Compute the deduction allowable under

section 35 for A.Y.2021-22, while computing his income under the head “Profits and gains of business
or profession”.

1. Amount paid to notified approved Indian Institute of Science, Bangalore, for scientific research 1,00,000

2. Amount paid to IIT, Delhi for an approved scientific research programme 2,50,000

3. Amount paid to X Ltd., a company registered in India which has as its main object scientific 4,00,000
research and development, as is approved by the prescribed authority
4. Expenditure incurred on in-house research and development facility as approved by the prescribed authority

Revenue expenditure on scientific research 3,00,000

(a)

Capital expenditure (including cost of acquisition of land ₹ 5,00,000) on scientific research 7,50,000
(b)

Sol:

Particulars ` Amount of deduction (`)

Payment for scientific research

1,00,000 1,00,000
Indian Institute of Science IIT, Delhi
X Ltd.
2,50,000 2,50,000

Expenditure incurred on in-house research and development facility

4,00,000 4,00,000

Revenue expenditure Capital expenditure

3,00,000 3,00,000

(excluding acquisition ` 5,00,000)

2,50,000 2,50,000

cost of of land
Deduction allowable under section 35 13,00,000

ILLUSTRATION 6
Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of food grains, sugar, and edible oil
on 1.4.2020. He incurred capital expenditure of ₹ 80 lakh, ₹ 60 lakh and ₹ 50 lakh, respectively, on purchase of land and
building during the period January 2020 to March 2020 exclusively for the above businesses, and capitalized the same in its
books of account as on 1st April 2020.

The cost of land included in the above figures is ₹ 50 lakh, ₹ 40 lakh, and ₹ 30 lakh, respectively. During the P.Y. 2020-21, he
incurred capital expenditure of ₹ 20 lakh, ₹ 15 lakh & ₹ 10 lakh, respectively, for extension/ reconstruction of the building
purchased and used exclusively for the above businesses.

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Compute the income under the head “Profits and gains of business or profession” for the A.Y.2021-22 and the loss to be carried
forward, assuming that Mr. A has fulfilled all the conditions specified under section 35AD and wants to claim deduction under
section 35AD and has not claimed any deduction under Chapter VI-A under the heading “C – Deductions in respect of certain
incomes”.

The profits from the business of setting up a warehousing facility for storage of food grains, sugar, and edible oil (before claiming
deduction under section 35AD and section 32) for the A.Y. 2021-22 is ₹ 16 lakhs, ₹ 14 lakhs and ₹ 31 lakhs, respectively. Also,
assume in respect of expenditure incurred, the payments are made by account payee cheque or use of ECS through bank account.

Sol:

Computation of profits and gains of business or profession for A.Y.2022-23

Profit from business of setting up of warehouse for storage of edible oil (before providing for depreciation under section 32) Less: Depreciation under section 32 31

10% of ` 30 lakh, being (` 50 lakh – ` 30 lakh + ` 10 lakh) 3

Income chargeable under “Profits and gains from business or profession ” 28

Computation of income/loss from specified business under section 35AD

Notes:

(i) Deduction of 100% of the capital expenditure is available under section 35AD for A.Y.2022-23 in respect of specified business of setting up and operating a warehousing facility for storage of sugar
and setting up and operating a warehousing facility for storage of agricultural produce where operations are commenced on or after 01.04.2012 or on or after 01.04.2009, respectively.

(iii) However, since setting up and operating a warehousing facility for storage of edible oils is not a specified business, Mr. A is not eligible for deduction under section 35AD in respect of capital
expenditure incurred in respect of such business.

(iii) Mr. A can, however, claim depreciation@10% under section 32 in respect of the capital expenditure incurred on buildings. It is presumed that the buildings were put to use for more than 180 days
during the P.Y.2021-22.

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(iv) Loss from a specified business can be set-off only against profits from another specified business. Therefore, the loss of ` 55 lakh from the specified businesses of setting up and operating a
warehousing facility for storage of food grains and sugar cannot be set-off against the profits of ` 28 lakh from the business of setting and operating a warehousing facility for storage of edible oils,
since the same is not a specified business. Such loss can, however, be carried forward indefinitely for set-off against profits of the same or any other specified business.

ILLUSTRATION 7
Mr. Suraj, a proprietor, commenced operations of the business of a new three-star hotel in Madurai, Tamil Nadu on 1.4.2020.
He incurred capital expenditure of ₹ 50 lakh during the period January, 2020 to March, 2020 exclusively for the above business,
and capitalized the same in his books of account as on 1st April, 2020. Further, during the P.Y. 2020-21, he incurred capital
expenditure of ₹ 2 crore (out of which ₹ 1.50 crore was for acquisition of land) exclusively for the above business.

Compute the income under the head “Profits and gains of business or profession” for the A.Y.2021-22, assuming that he has
fulfilled all the conditions specified under section 35AD and opted for claiming deduction under section 35AD; and he has not
claimed any deduction under Chapter VI-A under the heading “C – Deductions in respect of certain incomes”.

The profits from the business of running this hotel (before claiming deduction under section 35AD) for the A.Y.2021-22 is ₹ 25

lakhs. Assume that he also has another existing business of running a four-star hotel in Coimbatore, which commenced operations
fifteen years back, the profits from which are ₹ 120 lakhs for the A.Y.2021-22. Also, assume that payments for capital
expenditure were made by net banking.

OLUTION

Computation of profits and gains of business or profession for A.Y. 2022-23

Particulars `
Profits from the specified business of new hotel in Madurai (before providing deduction under section 35AD)

Less: Deduction under section 35AD

Capital expenditure incurred during the P.Y.2021-22 (excluding the expenditure incurred on acquisition of land) = ` 200 lakh – 25 lakh
` 150 lakh 50 lakh
Capital expenditure incurred prior to 1.4.2021 (i.e., prior to commencement of business) and capitalized in the books of
account as on 1.4.2021 50 lakh
Total deduction under section 35AD for A.Y.2022-23 100 lakh
Loss from the specified business of new hotel in Madurai (75 lakh)

Profit from the existing business of running a hotel in Coimbatore 120 lakh
Net profit from business after set-off of loss of specified business against profits of another specified business under section
45 lakh
73A

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ILLUSTRATION 8
Mr. Arnav is a proprietor having two units – Unit A carries on specified business of setting up and operating a
warehousing facility for storage of sugar; Unit B carries on non-specified business of operating a warehousing
facility for storage of edible oil.
Unit A commenced operations on 1.4.2019 and it claimed deduction of ₹ 100 lacs incurred on purchase of two
buildings for ₹ 50 lacs each (for operating a warehousing facility for storage of sugar) under section 35AD for
A.Y.2020-21. However, in February, 2021, Unit A transferred one of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of Mr. Arnav.

Sol:
Since the capital asset, in respect of which deduction of ` 50 lacs was claimed under section 35AD, has been transferred by Unit A carrying on specified
business to Unit B carrying on non-specified business in the P.Y.2021-22, the deeming provision under section 35AD(7B) is attracted during the
A.Y.2022-23

Particulars `
Deduction allowed under section 35AD for A.Y.2021-22 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2021-22 [10% of ` 50 lacs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000

Mr. Arnav, however, by virtue of proviso to Explanation 13 to section 43(1), can claim depreciation under section 32 on the building in Unit B for
A.Y.2022-23. For the purpose of claiming depreciation on building in Unit B, the actual cost of the building would be:

Actual cost to the assessee 50,00,000

Less: Depreciation allowable u/s 32 for A.Y.2021-22 [10% of ` 50 lacs] 5,00,000
Actual cost in the hands of Mr. Arnav in respect of building in its Unit B 45,00,000

ILLUSTRATION 9
X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme referred to in
section 80CCD. Dearness Allowance is 40% of basic salary and it forms part of pay of the employees.
Compute the amount of deduction allowable under section 36(1)(iva), if the basic salary of the employees
aggregate to ₹ 10 lakh. Would disallowance under section 40A(9) be attracted, and if so, to what extent?

Sol

Computation of deduction u/s 36(1)(iva) and disallowance u/s 40A(9)

Particulars `
Basic Salary 10,00,000
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e., 20% of ` 10 lakh)
2,00,000

Less: Permissible deduction under section 36(1)(iva) (10% of basic salary plus dearness pay = 10% of ` 14,00,000 = `
1,40,000
1,40,000)
Excess contribution disallowed under section 40A(9) 60,000

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ILLUSTRATION 10
Delta Ltd. credited the following amounts to the account of resident payees in the month of March, 2021 without
deduction of tax at source. What would be the consequence of non-deduction of tax at source by Delta Ltd. on

these amounts during the financial year 2020-21, assuming that the resident payees in all the cases mentioned
below, have not paid the tax, if any, which was required to be deducted by Delta Ltd.?

(1) Salary to its employees (credited and paid in March, 2021) 12,00,000
(2) Directors’ remuneration (credited in March, 2021 and paid in April, 2021) 28,000

Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April, 2021 at the time of
payment and remitted the same in July, 2021?

Sol

Particulars Amount paid in ` Disallowance u/s 40(a)(ia) @30%

(1) Salary [tax is deductible under section 192] 12,00,000 3,60,000
Directors’ remuneration

(2) 28,000 8,400

[tax is deductible under section 194J without any threshold
limit]
Disallowance under section 40(a)(ia) 3,68,400

If the tax is deducted on directors’ remuneration in the next year i.e., P.Y.2022- 23 at the time of payment and
remitted to the Government, the amount of ` 8,400 would be allowed as deduction while computing the
business income of A.Y. 2023-24.

ILLUSTRATION 11
During the financial year 2020-21, the following payments/expenditure were made/ incurred by Mr. Yuvan Raja,
a resident individual (whose turnover during the year ended 31.3.2020 was ₹ 99 lacs):
(i) Interest of ₹ 45,000 was paid to Rehman & Co., a resident partnership firm, without deduction of tax at
source.
(ii) ₹ 3,00,000 was paid as salary to a resident individual without deduction of tax at source.
(iii) Commission of ₹ 16,000 was paid to Mr. Vidyasagar, a resident, on 2.7.2020 without deduction of tax at
source.
Briefly discuss whether any disallowance arises under the provisions of section 40(a)(ia) of the Income-tax Act,

1961 assuming that the payees in all the cases mentioned above, have not paid the tax, if any, which was required
to be deducted by Mr. Raja?

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Sol: -

Disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee fails to deduct tax at source as is required under the
Act, or having deducted tax at source, fails to remit the same to the credit of the Central Government within the stipulated time limit.

(i) The obligation to deduct tax at source from interest paid to a resident arises under section 194A in the case of an individual, whose total turnover
in the immediately preceding previous year, i.e., P.Y.2020-21 exceeds ` 1 crore. Thus, in present case, since the turnover of the assessee is less than ` 1
crore, he is not liable to deduct tax at source. Hence, disallowance under section 40(a)(ia) is not attracted in this case.

(ii) The disallowance of 30% of the sums payable under section 40(a)(ia) would be attracted in respect of all sums on which tax is deductible under
Chapter XVII-B. Section 192, which requires deduction of tax at source from salary paid, is covered under Chapter XVII-B. The obligation to deduct tax
at source under section 192 arises, in the hands all assessee-employer even if the turnover amount does not exceed ` 1 crore in the immediately
preceding previous year.

Therefore, in the present case, the disallowance under section 40(a)(ia) is attracted for failure to deduct tax at source under section 192 from salary
payment. However, only 30% of the amount of salary paid without deduction of tax at source would be disallowed.

(iii) The obligation to deduct tax at source under section 194-H from commission paid in excess of ` 15,000 to a resident arises in the case of an
individual, whose total turnover in the immediately preceding previous year, i.e., P.Y.2020-21 exceeds ` 1 crore. Thus, in present case, since the turnover
of the assessee is less than ` 1 crore, he is not liable to deduct tax at source u/s 194-H. Mr. Raja is not required to deduct tax at source u/s 194M also
since the aggregate of such commission to Mr. Vidyasagar does not exceed ` 50 lakh during the P.Y. 2021-22. Therefore, disallowance under section
40(a)(ia) is not attracted in this case.

ILLUSTRATION 12
A firm has paid ₹ 7,50,000 as remuneration to its partners for the P.Y.2020-21, in accordance with its
partnership deed, and it has a book profit of ₹ 10 lakh. What is the remuneration allowable as deduction?

Sol

The allowable remuneration calculated as per the limits specified in section 40(b)(v) would be –

Particulars `
On first ` 3 lakh of book profit [` 3,00,000 × 90%]
2,70,000 4,20,000
On balance ` 7 lakh of book profit [` 7,00,000 × 60%]
6,90,000

The excess amount of ` 60,000 (i.e., ` 7,50,000 – ` 6,90,000) would be disallowed as per section 40(b)(v).

ILLUSTRATION 13
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of ₹ 7,00,000 before deduction of the following
items:
(1) Salary of ₹ 20,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership).
(2) Depreciation on plant and machinery under section 32 (computed) ₹ 1,50,000.
(3) Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital eligible for interest is ₹
5,00,000.
Compute:
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the assessment year 2021-22 as per section 40(b).

Sol:

As per Explanation 3 to section 40(b), “book profit” shall mean the net profit as per the profit and loss
account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by
the aggregate amount of the remuneration paid or payable to the partners of the firm if the same has been
already deducted while computing the net profit.

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In the present case, the net profit given is before deduction of depreciation on plant and machinery, interest
on capital of partners and salary to the working partners. Therefore, the book profit shall be as follows:

computation of Book Profit of the firm under section 40(b)

Salary actually paid to working partners = ` 20,000 × 2 × 12 = ` 4,80,000

Therefore, the maximum allowable working partners’ salary for the A.Y. 2022-23 in this case would be:

Particulars `
On the first ` 3,00,000 of book profit [(` 1,50,000 or 90% of ` 3,00,000) whichever is more]
2,70,000 1,14,000
On the balance of book profit [60% of (` 4,90,000 - ` 3,00,000)]
Maximum allowable partners’ salary 3,84,000

Hence, allowable working partners’ salary for the A.Y.2022-23 as per the provisions of section 40(b)(v) is ` 3,84,000

ILLUSTRATION 14
Hari, an individual, carried on the business of purchase and sale of agricultural commodities like paddy, wheat, etc. He borrowed
loans from Andhra Pradesh State Financial Corporation (APSFC) and Indian Bank and has not paid interest as detailed
hereunder.

(i) Andhra Pradesh State Financial Corporation (P.Y. 2019-20 & 2020-21) 15,00,000
(ii) Indian Bank (P.Y. 2020-21) 30,00,000
45,00,000

Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2020-21, converted the above
interest payable by Hari to them as a loan repayable in 60 equal installments. During the year ended 31.3.2021, Hari paid 5
installments to APSFC and 3 installments to Indian Bank.

Hari claimed the entire interest of ₹ 45,00,000 as an expenditure while computing the income from business of purchase and

sale of agricultural commodities. Examine whether his claim is valid and if not what is the amount of interest, if any, allowable

Sol:

Interest outstanding Number of Instalments Amount per instalment Instalments paid Interest allowable (`)
APSFC 15 lakh 60 25,000 5 1,25,000

Indian Bank 30 lakh 60 50,000 3 1,50,000

Total amount eligible for deduction 2,75,000

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Notified professions: The professions notified so far are as the profession of authorised representative; the
profession of film artist (actor, camera man, director, music director, art director, editor, singer, lyricist, story
writer, screen play writer, dialogue writer and dress designer); the profession of company secretary; and
information technology professionals.

Rules pertaining to maintenance of books of accounts & other documents:

Prescribed class of persons: As per Rule 6F, every person carrying on legal, medical, engineering, or
architectural profession or the profession of accountancy or technical consultancy or interior decoration or
authorised representative or film artist shall keep and maintain the books of account and other documents
specified in Rule 6F (2) in the following cases:

– if his gross receipts exceed ₹ 1,50,000 in all the 3 years immediately preceding the previous year; or

– if, where the profession has been newly set up in the previous year, his gross receipts are likely to exceed
₹ 1,50,000 in that year.

Prescribed books of accounts and other documents

The following books of account and other documents are required to be maintained.
(i) a cash book.

(ii) a journal if accounts are maintained on mercantile basis.

(iii) a ledger.

(iv) Carbon copies of bills and receipts issued by the person whether machine numbered or otherwise
serially numbered, in relation to sums exceeding ₹ 25.

(v) Original bills and receipts issued to the person in respect of expenditure incurred by the person, or
where such bills and receipts are not issued, payment vouchers prepared and signed by the person,
provided the amount does not exceed ₹ 50. Where the cash book contains adequate particulars, the
preparation and signing of payment vouchers is not required.

In case of a person carrying on medical profession.

(i) a daily case register in Form 3C.

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(ii) an inventory under broad heads of the stock of drugs, medicines, and other consumable accessories
as on the first and last day of the previous year used for his profession.

Period for which the books of account and other documents are required to be kept and maintained by
notified professions:

The above books of account and documents shall be kept and maintained for a minimum of 6 years from the
end of the relevant assessment year.

In case of Individual or HUF:

An Individual or HUF carrying on any business or profession (other than notified professions specified in
section 44AA (1)) must maintain such books of account and other documents as may enable the Assessing
Officer to compute his total income in accordance the provisions of the Income-tax Act, 1961 in the following
circumstances:

(i) Existing business or profession: In cases where the income from the existing business or profession
exceeds ₹ 2,50,000 or the total sales, turnover, or gross receipts, as the case may be, in the business or
profession exceed ₹ 25,00,000 in any one of three years immediately preceding the accounting year;
or

(ii) Newly set up business or profession: In cases where the business or profession is newly set up in any
previous year, if his income from business or profession is likely to exceed ₹ 2,50,000 or his total sales,
turnover, or gross receipts, as the case may be, in the business or profession are likely to exceed ₹
25,00,000 during the previous year.

Person (other than individual or HUF. Every person (other than individual or HUF) carrying on any business or
profession (other than the notified professions referred to in section 44AA(1)) must maintain such books of
account and other documents as may enable the Assessing Officer to compute his total income in
accordance the provisions of the Income-tax Act, 1961 in the following circumstances:

(i) Existing business or profession: In cases where the income from the business or profession exceeds ₹
1,20,000 or the total sales, turnover, or gross receipts, as the case may be, in the business or
profession exceed ₹ 10,00,000 in any one of three years immediately preceding the accounting year;
or

(ii) Newly set up business or profession: In cases where the business or profession is newly set up in any
previous year, if his income from business or profession is likely to exceed ₹ 1,20,000 or his total sales,
turnover, or gross receipts, as the case may be, in the business or profession are likely to exceed ₹
10,00,000 during the previous year.

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Showing lower income as compared to income computed on presumptive basis under section 44AE (or
section 44BB or section 44BBB):

Where profits and gains from the business are calculated on a presumptive basis under section 44AE (or
section 44BB or section 44BBB) and the assessee has claimed that his income is lower than the profits or
gains so deemed to be the profits and gains of his business.

Where the provisions of section 44AD (4) are applicable in his case and his income exceeds the basic
exemption limit in any previous year:

In cases, where an assessee not eligible to claim the benefit of the provisions of section 44AD (1) for five
assessment years subsequent to the assessment year relevant to the previous year in which the profit has not
been declared in accordance with the provisions of 44AD (1) and his income exceeds the basic exemption
limit during the previous year.

Presumptive Income provisions

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44AB Mandatory audit of accounts of certain persons

Category of person Condition for applicability of section 44AB

(a) In case of a person carrying on business If his total sales, turnover, or gross receipts in business > ₹ 1 crore in
the relevant PY

Note – The requirement of audit u/s 44AB does not apply to a person
who declares profits and gains on presumptive basis u/s 44AD and his
total sales, turnover, or gross receipts does not exceed ₹ 2 crore.
If in case of such person carrying on business – If his total sales, turnover, or gross receipts in business > ₹ 5 crore in
the relevant PY
(i) Aggregate cash receipts in the relevant PY ≤ 5% of
total receipts (incl. receipts for sales, turnover, gross
receipts); and

(ii) Aggregate cash payments in the relevant PY ≤ 5%

of total payments (incl. amount incurred for
expenditure)

(b) In case of a person carrying on profession If his gross receipts in profession > ₹ 50 lakh in the relevant PY

(c) In case of an assessee covered u/s 44AE i.e., an assessee If such assessee claims that the profits and gains from business in the
engaged in the business of plying, hiring, or leasing relevant P.Y. are lower than the profits and gains computed on a
goods carriages who owns not more than 10 goods presumptive basis u/s 44AE [i.e., ₹1000 per ton of gross vehicle weight
carriages at any time during the P.Y. or unladen weight in case of each heavy goods vehicle and ₹ 7,500 for
each vehicle, other than heavy goods vehicle, for every month or part
of the month for which the vehicle is owned by the assessee].
(d) In case of an assessee carrying on a notified profession If such resident assessee claims that the profits and gains from such
under section 44AA (1) i.e., legal medical, engineering, profession in the relevant PY are lower than the profits and gains
accountancy, architecture, interior decoration, technical computed on a presumptive basis u/s 44ADA (50% of gross receipts)
consultancy, whose gross receipts ≤ ₹ 50 lakhs and his income exceeds the basic exemption limit in that PY.

(e) In case of an eligible assessee carrying on business, If he declares profit for any of the five successive PYs (say, P.Y.2020-21)
whose total turnover, sales, gross receipts ≤ ₹ 200 lakhs, not in accordance with section 44AD (i.e., he declares profits lower
and who has opted for section 44AD in any earlier PY (say, than 8% or 6% of total turnover, sales, or gross receipts, as the case
P.Y.2019-20) may be, in that year), then he cannot opt for section 44AD for five
successive PYs after the year of such default (i.e., from P.Y.2021-22 to
P.Y.2025-26).

For the year of default (i.e., P.Y.2020-21) and five successive previous
years (i.e., P.Y.2021-22 to P.Y.2025-26), he has to maintain books of
account u/s 44AA and get them audited u/s 44AB, if his income
exceeds the BEL

Section Particulars Deemed profits and gains

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44AD Any individual, HUF or firm who is a resident (other than LLP) who has 8% of gross receipts or total turnover or such
not claimed deduction under section 10AA or Chapter VI-A” engaged higher sum claimed to have been earned by him.
in any business (except 44AE) and whose total turnover or gross
receipts in the previous year does not exceed ₹ 2 crore. However, the presumptive income would be 6%
(instead of 8%) of total turnover or sales, in respect
This section will not apply to – of amount which is received.
(i) a person carrying on specified professions referred to in • by an account payee cheque or
section 44AA (1) • by an account payee bank draft or
(ii) a person earning income in the nature of commission or • by use of electronic clearing system through a
brokerage. bank account or
(iii) a person carrying on agency business. • through such other prescribed electronic modes
during the previous year or before the due date of
filing of return under section 139(1) in respect of
that previous year.

44ADA An assessee, being a resident in India, who is engaged – in any 50% of the gross receipts or such higher sum
profession referred to in section 44AA (1) and whose total gross claimed to have been earned by him.
receipts does not exceed ₹ 50 lakhs in a previous year

44AE Any assessee who owns not more than ten goods carriages at any For each heavy goods vehicle, ₹ 1,000 per ton of
time during the previous year and who is engaged in the business of gross vehicle weight or unladen weight, as the case
plying, hiring, and leasing goods carriages. may be, for every month or part of a month during
which the vehicle is owned by the assessee.

For each vehicle, other than heavy goods vehicle, ₹

7,500 per month or part of a month during which
such vehicle is owned by the assessee (or) an
amount claimed to have been actually earned from
such vehicle,
whichever is higher

Taxability in case of composite income

Carry Forward and Set-off of Losses in the case of Closely Held Companies [Sec. 79]

In case of a company in which public are not substantially interested (other than eligible start-up company
referred below), no loss shall be carried forward and set off against the income of the previous year, unless at
least 51% of the voting power of the company are beneficially held (on the last day of the previous year in

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which the loss is sought to be set off) by the same person(s) who held at least 51% of the shares on the last
day of the financial year in which the loss was incurred.

Taxpoint
(i) Losses under the head ‘Capital gains’: Sec. 79 applies to all losses, including losses under the head
Capital gains.

(ii) Unabsorbed depreciation: The above provision is not applicable on unabsorbed depreciation; such
unabsorbed depreciation shall be allowed to be carried forward.

Option for eligible start-up company

In the case of eligible start-up company, not being a company in which the public are substantially interested,
the loss incurred in any year prior to the previous year shall be carried forward and set off against the income
of the previous year, if:
• All the shareholders of such company who held shares carrying voting power on the last day of the year
or years in which the loss was incurred continue to hold those shares on the last day of such previous
year; and

• Such loss has been incurred during the period of 7 years beginning from the year in which such company
is incorporated.

Exceptions:
However, change in the shareholding due to following reasons shall not be considered-
(i) Transfer due to death:
(ii) Transfer by way of gift:
(iii) Amalgamation or demerger of foreign company:
(iv) Insolvency and Bankruptcy Code:
(v) Distressed Company:

Questions

ILLUSTRATION 15
Vinod is a person carrying on profession as film artist. His gross receipts from profession are as under:
Particulars ₹
Financial year 2017-18 1,15,000
Financial year 2018-19 1,80,000
Financial year 2019-20 2,10,000

What is his obligation regarding maintenance of books of accounts for Assessment Year 2021-22 under
section 44AA of Income-tax Act, 1961?

Sol

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In the present case, Vinod is a person carrying on profession as film artist, which is a notified profession.
Since his gross receipts have not exceeded ` 1,50,000 in financial year 2018-19, the requirement under section
44AA to compulsorily maintain the prescribed books of account is not applicable to him.

Mr. Vinod, however, required to maintain such books of accounts as would enable the Assessing Officer to
compute his total income.

ILLUSTRATION 16
Mr. Praveen engaged in retail trade, reports a turnover of ₹ 1,98,50,000 for the financial year 2020-21. His
income from the said business as per books of account is ₹ 13,20,000 computed as per the provisions of
Chapter IV-D “Profits and gains from business or Profession” of the Income-tax Act, 1961. Retail trade is the
only source of income for Mr. Praveen. A.Y. 2020-21 was the first year for which he declared his business
income in accordance with the provisions of presumptive taxation u/s 44AD.

(i) Is Mr. Praveen also eligible to opt for presumptive determination of his income chargeable to tax for
the assessment year 2021-22?

(ii) If so, determine his income from retail trade as per the applicable presumptive provision assuming
that whole of the turnover represents cash receipts.

(iii) In case Mr. Praveen does not opt for presumptive taxation of income from retail trade, what are his
obligations under the Income-tax Act, 1961?

(iv) What is the due date for filing his return of income under both the options?

Sol

(i) Yes. Since his total turnover for the F.Y.2021-22 is below ` 200 lakhs, he is eligible to opt for presumptive
taxation scheme under section 44AD in respect of his retail trade business.

(ii) His income from retail trade, applying the presumptive tax provisions under section 44AD, would be `
15,88,000, being 8% of ` 1,98,50,000.

(iii) Mr. Praveen had declared profit for the previous year 2020-21 in accordance with the presumptive
provisions and if he does not opt for presumptive provisions for any of the five consecutive assessment years
i.e., A.Y. 2022-23 to A.Y. 2026-27, he would not be eligible to claim the benefit of presumptive taxation for
five assessment years subsequent to the assessment year relevant to the previous year in which the profit has
not been declared in accordance the presumptive provisions i.e. if he does not opt for presumptive taxation
in say P.Y. 2021-22 relevant to A.Y.2022-23, then he would not be eligible to claim the benefit of presumptive
taxation for A.Y. 2023-24 to A.Y. 2027-28.

Consequently, Mr. Praveen is required to maintain the books of accounts and get them audited under section
44AB, since his income exceeds the basic exemption limit.

(iv) In case he opts for the presumptive taxation scheme under section 44AD, the due date would be 31st July,
2022.

In case he does not opt for presumptive taxation scheme, he is required to get his books of account audited,
in which case the due date for filing of return of income would be 31st October, 2022

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ILLUSTRATION 17
Mr. X commenced the business of operating goods vehicles on 1.4.2020. He purchased the following vehicles
during the P.Y.2020-21. Compute his income under section 44AE for A.Y.2021-22.

Would your answer change if the goods vehicles purchased in April, 2020 were put to use only in July, 2020?

he presumptive income of Mr. X under section 44AE for A.Y.2022-23 would be - ` 6,82,500, i.e., 55 × ` 7,500,
being for other than heavy goods vehicle + 18 x ` 1,000 x 15 ton being for heavy goods vehicle .

The answer would remain the same even if the two vehicles purchased in April, 2021 were put to use only in
July, 2021, since the presumptive income has to be calculated per month or part of the month for which the
vehicle is owned by Mr. X.

Question 3
Examine with reasons, the allowability of the following expenses incurred by Mr. Manav, a wholesale dealer of
commodities, under the Income-tax Act, 1961 while computing profit and gains from business or profession
for the Assessment Year 2021-22.

(i) Construction of school building in compliance with CSR activities amounting to ₹ 5,60,000.

(ii) Purchase of building for the purpose of specified business of setting up and operating a warehousing
facility for storage of food grains amounting to ₹ 4,50,000.

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(iii) Interest on loan paid to Mr. X (a resident) ₹ 50,000 on which tax has not been deducted. The sales for
the previous year 2019-20 was ₹ 202 lakhs. Mr. X has not paid the tax, if any, on such interest.

(iv) Commodities transaction tax paid ₹ 20,000 on sale of bullion

Sol:

1. No
2. 4,50,000
3. 35,000
4. Yes

Question 4
Examine with reasons, for the following sub-divisions, whether the following statements are true or false
having regard to the provisions of the Income-tax Act, 1961:

(i) For a dealer in shares and securities, securities transaction tax paid in a recognized stock exchange is
permissible business expenditure.

(ii) Where a person follows mercantile system of accounting, an expenditure of ₹ 25,000 has been
allowed on accrual basis and in a later year, in respect of the said expenditure, assessee makes the
payment of ₹ 25,000 through a cheque crossed as "& Co., ₹ 25,000 can be the profits and gains of
business under section 40A(3A) in the year of payment.

(iii) It is mandatory to provide for depreciation under section 32 of the Income-tax Act, 1961, while
computing income under the head “Profits and Gains from Business and Profession”.

(iv) The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by a draft, on 27.12.2020 is a
deductible expenditure under section 36.

(v) Under section 35DDA, amortization of expenditure incurred under eligible Voluntary Retirement
Scheme at the time of retirement alone, can be done.

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(vi) An existing assessee engaged in trading activities, can claim additional depreciation under section
32(1)(iia) in respect of new plant acquired and installed in the trading concern, where the increase in
value of such plant as compared to the approved base year is more than 10%.

Sol:
1. True
2. True
3. True
4. True
5. False
6. False

Question 5
Examine, with reasons, the allowability of the following expenses under the Income-tax Act, 1961 while
computing income from business or profession for the Assessment Year 2021-22:
(i) Provision made on the basis of actuarial valuation for payment of gratuity ₹ 5,00,000. However, no
payment on account of gratuity was made before due date of filing return.

(ii) Purchase of oil seeds of ₹ 50,000 in cash from a farmer on a banking day.

(iii) Tax on non-monetary perquisite provided to an employee ₹ 20,000.

(iv) Payment of ₹ 50,000 by using credit card for fire insurance.

(v) Salary payment of ₹ 4,00,000 to Mr. X outside India by a company without deduction of tax assuming
Mr. X has not paid tax on such salary income.

(vi) Payment made in cash ₹ 30,000 to a transporter in a day for carriage of goods

Sol.
1. Not allowed as deduction
2. Allowed as deduction
3. Not allowed as deduction
4. Allowed
5. Not Allowed
6. Allowed

Question 6

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Examine with reasons, whether the following statements are true or false, with regard to the provisions of the
Income-tax Act, 1961:

(a) Payment made in respect of a business expenditure incurred on 16th February, 2021 for ₹ 25,000
through a cheque duly crossed as "& Co." is hit by the provisions of section 40A(3).

(b)
(i) It is a condition precedent to write off in the books of account, the amount due from debtor to
claim deduction for bad debt.

(ii) Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B, inter alia,
from the amounts payable to a non-resident as rent or royalty, will result in disallowance while
computing the business income where the non-resident payee has not paid the tax due on
such income.

Sol

1. True
2.
a. True
b. True

Question 7
Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account for the year
ended 31st March, 2021:

Trading and Profit and Loss Account for the year ended 31.03.2021

Particulars ₹ Particulars ₹
To Opening stock 90,000 By Sales 1,12,11,500
To Purchases 1,10,04,000 By Closing stock 1,86,100
To Gross Profit 3,03,600 -
1,13,97,600 1,13,97,600
To Salary 60,000 By Gross profit b/d 3,03,600
To Rent and rates 36,000 By Income from UTI 2,400
To Interest on loan 15,000

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To Depreciation 1,05,000
To Printing & stationery 23,200
To Postage & telegram 1,640
To Loss on sale of shares (Short term) 8,100
To Other general expenses 7,060
To Net Profit 50,000

3,06,000 3,06,000

Additional Information:

(i) It was found that some stocks were omitted to be included in both the Opening and Closing Stock,
the values of which were:

Opening stock ₹ 9,000

Closing stock ₹ 18,000

(ii) Salary includes ₹ 10,000 paid to his brother, which is unreasonable to the extent of ₹ 2,000.

(iii) The whole amount of printing and stationery was paid in cash by way of one time payment to Mr.
Ramesh.

(iv) The depreciation provided in the Profit and Loss Account ₹ 1,05,000 was based on the following
information:

The written down value of plant and machinery is ₹ 4,20,000 as on 01.04.2020. A new plant falling
under the same block of depreciation was bought on 01.7.2020 for ₹ 70,000. Two old plants were sold
on 1.10.2020 for ₹ 50,000.

(v) Rent and rates includes GST liability of ₹ 3,400 paid on 7.4.2021.

(vi) Other general expenses include ₹ 2,000 paid as donation to a Public Charitable Trust.

You are required to compute the profits and gains of Mr. Sivam under presumptive taxation under section
44AD and profits and gains as per normal provisions of the Act assuming he has not opted for the provisions
of section 115BAC.

Assume that the whole of the amount of turnover received by account payee cheque or use of electronic
clearing system through bank account during the previous year.

Sol

Computation of business income of Mr. Sivam for the A.Y. 2022-23

Particulars ` `

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Net Profit as per profit and loss account 50,000

Add: Inadmissible expenses/ losses

Under valuation of closing stock
18,000
Salary paid to brother – unreasonable [Section 40A(2)]
2,000
Printing and stationery -whole amount of printing & stationery paid in cash would
be disallowed, since such amount exceeds ` 10,000 [Section 40A(3)] 23,200

Depreciation (considered separately)

Short term capital loss on shares Donation to public charitable trust 1,05,000

8,100

2,000

1,58,300
Less: 2,08,300

Items to be deducted: 9,000

Under valuation of opening stock
Income from UTI [Chargeable under the head “Income from Other Sources] 2,400 11,400
Less: Business income before depreciation 1,96,900

Depreciation (See Note 1) 66,000

1,30,900
Depreciation calculations

Particulars `
Opening balance of plant & machinery as on 1.4.2021 (i.e. WDV as on 31.3.2021 (-) depreciation for P.Y. 2020-21) 4,20,000

Add : Cost of new plant & machinery 70,000

Less : Sale proceeds of assets sold 4,90,000

50,000
WDV of the block of plant & machinery as on 31.3.2022 4,40,000
Depreciation @ 15% 66,000

No additional depreciation is allowable as the assessee is not engaged in manufacture or production of any article.

Question 8
Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April 2020, he owns 10 trucks
(out of which 6 are heavy goods vehicles, the gross vehicle weight of such goods vehicle is 15,000 kg each).

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On 2nd May 2020, he sold one of the heavy goods vehicles and purchased a light goods vehicle on 6th May
2020. This new vehicle could however be put to use only on 15th June 2020.

Compute the total income of Mr. Sukhvinder for the assessment year 2021-22, taking note of the following
data:

Particulars ₹ ₹
Freight charges collected 12,70,000
Less: Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 4,45,000
Other business and non- business income 70,000

Sol-

Mr. Sukhvinder’s business income calculated applying the provisions of section 44AE is ` 13,72,500 (See
Notes 1 & 2 below) and his total income would be ` 14,42,500.

However, as per section 44AE(7), Mr. Sukhvinder may claim lower profits and gains if he keeps and maintains
proper books of account as per section 44AA and gets the same audited and furnishes a report of such audit
as required under section 44AB. If he does so, then his income for tax purposes from goods carriages would
be ` 4,45,000 instead of ` 13,72,500 and his total income would be ` 5,15,000.

Computation of total income of Mr. Sukhvinder for A.Y. 2022-23

Calculation of presumptive income as per section 44AE

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Amount
No. of Rate per ton per month/ per
Type of carriage Ton
months month
`
(1) (2) (3) (4)

Heavy goods vehicle

st
1 goods carriage upto 1 May 2 1,000 15 (15,000/
1,000) 30,000
5 goods carriage held throughout the 12 1,000 9,00,000
year 15 (15,000/
11 7,500 1,000) 82,500
Goods vehicle other than heavy goods 3,60,000
vehicle 12 7,500 - -

th
1 goods carriage from 6 May
4 goods carriage held throughout the
year

Total 13,72,500

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